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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to             

Commission File Number: 001-32979

 

Threshold Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-3409596

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

170 Harbor Way, Suite  300, South San Francisco, CA 94080

(Address of principal executive offices, including zip code)

(650) 474-8200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

On July 25, 2014, there were 59,366,054 shares of common stock, par value $0.001 per share, of Threshold Pharmaceuticals, Inc. outstanding.

 

 

 


Threshold Pharmaceuticals, Inc.

TABLE OF CONTENTS

 

 

  

 

Page

PART I.

  

FINANCIAL INFORMATION

 

 

Item 1.

  

Unaudited Condensed Consolidated Financial Statements

 

3

 

  

Unaudited Condensed Consolidated Balance Sheets

 

3

 

  

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

 

4

 

  

Unaudited Condensed Consolidated Statements of Cash Flows

 

5

 

  

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

 

21

Item 4.

  

Controls and Procedures

 

21

PART II.

  

OTHER INFORMATION

 

 

Item 1

  

Legal Proceedings

 

22

Item 1A.

  

Risk Factors

 

22

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

Item 3.

  

Defaults Upon Senior Securities

 

41

Item 4.

  

Mine Safety Disclosures

 

41

Item 5.

  

Other Information

 

41

Item 6.

  

Exhibits

 

42

SIGNATURES

 

43

 

EXHIBIT INDEX

 

44

 

The terms “Threshold,” “we,” “us,” “the Company” and “our” as used in this report refer to Threshold Pharmaceuticals, Inc. Threshold Pharmaceuticals, Inc., our logo and Metabolic Targeting are our trademarks. Other trademarks, trade names and service marks used in this quarterly report on Form 10-Q are the property of their respective owners.

 

 

 


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Threshold Pharmaceuticals, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

 

June 30,

2014

 

 

December 31,

2013 (Note 1)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

6,463

 

 

$

7,279

 

Marketable securities, current

 

56,571

 

 

 

58,390

 

Collaboration receivable

 

4,263

 

 

 

18,094

 

Prepaid expenses and other current assets

 

2,845

 

 

 

2,246

 

 

 

 

 

 

 

 

 

Total current assets

 

70,142

 

 

 

86,009

 

Marketable securities, non-current

 

12,181

 

 

 

16,364

 

Property and equipment, net

 

690

 

 

 

686

 

Other assets

 

1,159

 

 

 

1,059

 

 

 

 

 

 

 

 

 

Total assets

$

84,172

 

 

$

104,118

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

2,891

 

 

$

1,689

 

Accrued clinical and development expenses

 

7,173

 

 

 

7,444

 

Accrued liabilities

 

2,511

 

 

 

3,161

 

Deferred revenue, current

 

14,722

 

 

 

14,722

 

 

 

 

 

 

 

 

 

Total current liabilities

 

27,297

 

 

 

27,016

 

Warrant liability

 

15,299

 

 

 

23,421

 

Deferred revenue, non-current

 

69,555

 

 

 

76,916

 

Deferred rent

 

274

 

 

 

240

 

 

 

 

 

 

 

 

 

Total liabilities

 

112,425

 

 

 

127,593

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 2,000,000 shares authorized; no shares issued and outstanding

 

 

 

 

 

Common stock, $0.001 par value, shares authorized: 150,000,000 shares; issued and outstanding:

   59,365,233 shares at June 30, 2014 and 59,232,611 shares at December 31, 2013

 

59

 

 

 

59

 

Additional paid-in capital

 

331,224

 

 

 

328,116

 

Accumulated other comprehensive gain (loss)

 

17

 

 

 

28

 

Accumulated deficit

 

(359,553

)

 

 

(351,678

)

 

 

 

 

 

 

 

 

Total stockholders’ equity (deficit)

 

(28,253

)

 

 

(23,475

)

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity (deficit)

$

84,172

 

 

$

104,118

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

3


 

Threshold Pharmaceuticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

(unaudited)

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

3,680

 

 

$

3,180

 

 

$

7,361

 

 

$

6,102

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

8,664

 

 

 

7,983

 

 

 

18,317

 

 

 

14,451

 

General and administrative

 

2,477

 

 

 

2,166

 

 

 

5,111

 

 

 

4,681

 

Total operating expenses

 

11,141

 

 

 

10,149

 

 

 

23,428

 

 

 

19,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(7,461

)

 

 

(6,969

)

 

 

(16,067

)

 

 

(13,030

)

Interest income (expense), net

 

30

 

 

 

34

 

 

 

70

 

 

 

70

 

Other income (expense), net

 

6,665

 

 

 

(5,822

)

 

 

8,122

 

 

 

(8,938

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

(766

)

 

 

(12,757

)

 

 

(7,875

)

 

 

(21,898

)

Provision for income taxes

 

 

 

 

31

 

 

 

 

 

 

104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(766

)

 

 

(12,788

)

 

 

(7,875

)

 

 

(22,002

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

4

 

 

 

(33

)

 

 

(11

)

 

 

(38

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

$

(762

)

 

$

(12,821

)

 

$

(7,886

)

 

$

(22,040

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.01

)

 

$

(0.22

)

 

$

(0.13

)

 

$

(0.39

)

Diluted

$

(0.12

)

 

$

(0.22

)

 

$

(0.25

)

 

$

(0.39

)

Weighted average number of shares used in per common share

   calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

59,347

 

 

 

57,037

 

 

 

59,325

 

 

 

56,763

 

Diluted

 

62,998

 

 

 

57,037

 

 

 

63,433

 

 

 

56,763

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

4


 

Threshold Pharmaceuticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(7,875

)

 

$

(22,002

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

726

 

 

 

664

 

Stock-based compensation expense

 

2,734

 

 

 

2,325

 

Change in common stock warrant value

 

(8,122

)

 

 

8,938

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Collaboration receivable

 

13,831

 

 

 

13,087

 

Prepaid expenses and other assets

 

(699

)

 

 

(746

)

Accounts payable

 

1,202

 

 

 

(24

)

Accrued clinical and development expenses

 

(271

)

 

 

1,269

 

Accrued liabilities

 

(650

)

 

 

(216

)

Deferred rent

 

34

 

 

 

(11

)

Deferred revenue

 

(7,361

)

 

 

23,898

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(6,451

)

 

 

27,182

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(171

)

 

 

(97

)

Acquisition of marketable securities

 

(33,137

)

 

 

(74,904

)

Proceeds from sale of marketable securities

 

8,214

 

 

 

1,000

 

Proceeds from maturities of marketable securities

 

30,355

 

 

 

39,358

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

5,261

 

 

 

(34,643

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock and warrants, net of offering expenses

 

374

 

 

 

845

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

374

 

 

 

845

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(816

)

 

 

(6,616

)

Cash and cash equivalents, beginning of period

 

7,279

 

 

 

11,029

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

$

6,463

 

 

$

4,413

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

5


 

Threshold Pharmaceuticals, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Threshold Pharmaceuticals, Inc. (the “Company”) is a biotechnology company using its expertise in the tumor microenvironment to discover and develop therapeutic agents that selectively target tumor cells for the treatment of patients living with cancer.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair statement of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimate could result in a change to estimates and impact future operating results.

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited condensed consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding fiscal year. The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2014.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, and reflect the elimination of intercompany accounts and transactions.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 605 “Revenue Recognition”, subtopic ASC 605-25 “Revenue with Multiple Element Arrangements” and subtopic ASC 605-28 “Revenue Recognition-Milestone Method”, which provides accounting guidance for revenue recognition for arrangements with multiple deliverables and guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research and development transactions is appropriate, respectively.

The Company’s revenues are related to its collaboration arrangement with Merck KGaA, which was entered in February 2012. The collaboration with Merck KGaA provides for various types of payments to the Company, including non-refundable upfront license, milestone and royalty payments. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. The Company also receives reimbursement for Merck KGaA’s 70% share for eligible worldwide development expenses for TH-302. Such reimbursement is reflected as a reduction of operating expenses.

For multiple-element arrangements, each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company’s control. The deliverables under the Merck KGaA agreement have been determined to be a single unit of accounting and as such the revenue relating to this unit of accounting will be recorded as deferred revenue and recognized ratably over the term of its estimated performance period under the agreement, which is the product development period. The Company determines the estimated performance period and it will be periodically reviewed based on the progress of the related product development plan. The effect of a change made to an estimated performance period, and the related ratably recognized revenue, would occur on a prospective basis in the period that the change was made.

6


 

Deferred revenue associated with a non-refundable payment received under a collaborative agreement for which the performance obligations are terminated will result in an immediate recognition of any remaining deferred revenue in the period that termination occurred provided that all performance obligations have been satisfied.

The Company recognizes revenue from milestone payments when: (i) the milestone event is substantive and its achievability has substantive uncertainty at the inception of the agreement, and (ii) the Company does not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either the Company’s performance subsequent to the inception of the arrangement to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company’s performance subsequent to the inception of the arrangement to achieve the milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangements. See Note 3, “Collaboration Arrangements,” for analysis of milestone events deemed to be substantive or non-substantive.

 

NOTE 2 — NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed by giving effect to all potential dilutive common shares, including outstanding options and warrants.

Potential dilutive common shares also include the dilutive effect of the common stock underlying in-the-money stock options and warrants that were calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an option or warrant is assumed to be used to repurchase shares in the current period. In addition, the average amount of compensation cost for in-the-money options, if any, for future service that the Company has not yet recognized when the option is exercised, is also assumed to repurchase shares in the current period. A reconciliation of the numerator and denominator used in the calculation is as follows (in thousands, except per share amounts):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss - basic

$

(766

)

 

$

(12,788

)

 

$

(7,875

)

 

$

(22,002

)

Less: noncash income from change in fair

   value of common stock warrants

 

(6,665

)

 

 

 

 

 

(8,122

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss - diluted

 

(7,431

)

 

 

(12,788

)

 

 

(15,997

)

 

 

(22,002

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

59,347

 

 

 

57,037

 

 

 

59,325

 

 

 

56,763

 

Dilutive effect of warrants

 

3,651

 

 

 

 

 

 

4,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

   and dilutive potential common shares —

   diluted

 

62,998

 

 

 

57,037

 

 

 

63,433

 

 

 

56,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.01

)

 

$

(0.22

)

 

$

(0.13

)

 

$

(0.39

)

Diluted

$

(0.12

)

 

$

(0.22

)

 

$

(0.25

)

 

$

(0.39

)

 

 

7


 

The following outstanding warrants, options and purchase rights under the Company’s 2004 Employee Stock Purchase Plan were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect (in thousands):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Shares issuable upon exercise of warrants

 

 

 

 

9,634

 

 

 

 

 

 

9,634

 

Shares issuable upon exercise of stock options

 

8,161

 

 

 

6,570

 

 

 

8,161

 

 

 

6,570

 

Shares issuable related to the ESPP

 

71

 

 

 

85

 

 

 

71

 

 

 

85

 

 

 

NOTE 3 — COLLABORATION ARRANGEMENTS

On February 3, 2012, the Company entered into a global license and co-development agreement with Merck KGaA, Darmstadt, Germany, to co-develop and commercialize TH-302, the Company’s small molecule hypoxia-targeted drug. Under the terms of the agreement, Merck KGaA received co-development rights, exclusive global commercialization rights and provided the Company with an option to co-commercialize TH-302 in the United States. To date, the Company has received $110 million in upfront and milestone payments, including $12.5 million received during the quarter ended March 31, 2014. The milestones earned to date were not deemed to be substantive milestones because the work related to the achievement of these items was predominately completed prior to the inception of the arrangement or was not commensurate with Company’s performance subsequent to the inception of the arrangement to achieve the milestone. The Company is eligible to earn additional potential milestone payments of up to $100 million in regulatory and development milestones, and $340 million in commercialization milestones.

In the United States, the Company has primary responsibility for development of TH-302 in the soft tissue sarcoma indication. The Company and Merck KGaA will jointly develop TH-302 in all other cancer indications being pursued. Merck KGaA will pay 70% of worldwide development expenses for TH-302. Subject to FDA approval in the United States, Merck KGaA will initially be responsible for commercialization of TH-302 with the Company receiving a tiered, double-digit royalty on sales. Under the royalty bearing portion of the agreement, Threshold retains the option to co-promote TH-302 in the United States. Additionally, the Company retains the option to co-commercialize TH-302 in the United States, upon the achievement of certain sales and regulatory milestones, allowing the Company to participate in up to 50% of the profits in the United States depending on total sales. Outside of the United States, Merck KGaA will be solely responsible for the commercialization of TH-302 with the Company receiving a tiered, double digit royalty on sales in these territories. The agreement will continue on a country-by-country and product-by-product basis until the later of the last to expire patent covering such product containing TH-302 in such country or ten years following the commercial launch of a product containing TH-302 in such country, unless terminated earlier. Merck KGaA has the right to terminate the agreement on limited notice to the Company, and each party has the right to terminate the agreement following an uncured material breach by the other party.

The Company’s deliverables under the Merck KGaA agreement, which include delivery of the rights and license for TH-302 and performance of research and development activities, have been determined to be a single unit of accounting. The delivered license does not have standalone value at the inception of the arrangement due to the Company’s proprietary expertise with respect to the licensed compound and related ongoing developmental participation under the global license and co-development agreement, which is required for Merck KGaA to fully realize the value from the delivered license. Therefore, the revenue relating to this unit of accounting will be recorded as deferred revenue and recognized over the estimated performance period under the agreement, which is the product development period. The Company has recorded $110 million of the upfront payment and milestones payments as deferred revenue and is amortizing them ratably over its estimated period of performance, which the Company currently estimates to end on March 31, 2020. As a result, the Company recognized $3.7 million and $7.4 million of revenue during the three and six months ended June 30, 2014, respectively, compared to $3.2 and $6.1 million for the three and six months ended June 30, 2013, respectively. The Company will periodically review and, if necessary, revise the estimated periods of performance of its collaboration. The Company also earned $3.5 million and $9.4 million reimbursement for eligible worldwide development expenses for TH-302 from Merck KGaA during the three and six months ended June 30, 2014, respectively compared to $2.5 million and $6.1 million for the three and six months ended June 30, 2013, respectively. Such earned reimbursement has been reflected as a reduction of operating expenses.

Of the remaining potential future milestones, $100 million are related to regulatory and development milestones and $340 million are related to commercialization milestones that may be received under the Merck KGaA Agreement. Regulatory milestones include the filing and acceptance of regulatory applications for marketing approval in major markets. Development milestones include primarily the initiation of various phases of clinical trials. Commercialization milestones include the achievement of first commercial sales in a particular market or annual product sales in excess of a pre-specified threshold. At the inception of the collaboration agreement the Company assessed regulatory and development milestones to be substantive where there was substantive scientific and regulatory uncertainty of achievement, the amounts of payments assigned were considered to be commensurate with the enhancement

8


 

that occurred subsequent to inception of the Merck KGaA agreement, of the value of the delivered rights and license of TH-302 and the Company’s performance is necessary to the achievement of the milestone. Accordingly, the Company will recognize payments related to the achievement of such milestones, if any, when such milestone is achieved. Regulatory and development milestones that do not meet these conditions were considered non-substantive and payments related to the achievement of such milestones, if any, will be recorded as deferred revenue and amortized ratably over the estimated period of performance. Final determination of whether a development or regulatory milestone is substantive will depend upon the Company’s role in achieving the milestone. The specific role and responsibilities related to the regulatory and development activities for certain of these milestones have yet to be determined and may change during the development period. Under the Merck KGaA agreement, Merck KGaA will initially be responsible for commercialization activities and the Company initially may not be involved in the achievement of these commercialization milestones. These commercialization milestones would typically be achieved after the completion of the Company’s regulatory and development activities. If there are no future development obligations, the Company expects to account for the commercialization milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone.

 

NOTE 4 — STOCKHOLDERS’ EQUITY

Common Stock Warrants

The Company accounts for its common stock warrants under guidance in ASC 815 that clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify for classification as liabilities. The guidance required the Company’s outstanding warrants to be classified as liabilities and to be fair valued at each reporting period, with the changes in fair value recognized as other income (expense) in the Company’s consolidated statements of operations.

At both June 30, 2014 and December 31, 2013, the Company had warrants outstanding to purchase 4,287,940 shares of common stock, having an exercise price of $2.05 per share, which warrants were initially issued by the Company in a private placement in October 2009. The fair value of these warrants on June 30, 2014 and December 31, 2013 was determined using a Black Scholes valuation model with the following level 3 inputs:

 

 

 

June 30,

2014

 

 

December 31,

2013

 

Risk-free interest rate

 

0.11

%

 

 

0.13

%

Expected life (in years)

 

0.27

 

 

 

0.76

 

Dividend yield

 

 

 

 

 

Volatility

 

44

%

 

 

49

%

Stock price

$

3.96

 

 

$

4.67

 

 

 

During the three and six months ended June 30, 2014, the change in fair value of $3.4 million and $3.1 million, respectively, related to the October 2009 warrants was recorded as other income in the Company’s consolidated statement of operations.

At both June 30, 2014 and December 31, 2013, the Company had also warrants outstanding to purchase 3,993,783 shares of common stock, having an exercise price of $2.46 per share, which warrants were initially issued by the Company in an underwritten public offering in March 2011. The fair value of these warrants on June 30, 2014 and December 31, 2013 was determined using a Black Scholes valuation model with the following level 3 inputs:

 

 

 

June 30,

2014

 

 

December 31,

2013

 

Risk-free interest rate

 

0.47

%

 

 

0.78

%

Expected life (in years)

 

1.71

 

 

 

2.21

 

Dividend yield

 

 

 

 

 

Volatility

 

50

%

 

 

88

%

Stock price

$

3.96

 

 

$

4.67

 

 

 

During the three and six months ended June 30, 2014, the change in fair value of $3.2 million and $5.0 million, respectively, related to the March 2011 warrants was recorded as other income in the Company’s consolidated statement of operations.

 

9


 

The following table sets forth the Company’s financial liabilities, related to warrants issued in the October 2009 and March 2011 offerings, subject to fair value measurements as of June 30, 2014 and December 31, 2013:

 

 

Fair Value as of

June 30,

2014

 

 

Basis of Fair Value Measurements

 

(in thousands)

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

October 2009 warrants

$

8,190

 

 

$

 

 

$

 

 

$

8,190

 

March 2011 warrants

 

7,109

 

 

 

 

 

 

 

 

 

7,109

 

Total common stock warrants

$

15,299

 

 

$

 

 

$

 

 

$

15,299

 

 

 

Fair Value as of

December 31,

2013

 

 

Basis of Fair Value Measurements

 

(in thousands)

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

October 2009 warrants

$

11,320

 

 

$

 

 

$

 

 

$

11,320

 

March 2011 warrants

 

12,101

 

 

 

 

 

 

 

 

 

12,101

 

Total common stock warrants

$

23,421

 

 

$

 

 

$

 

 

$

23,421

 

 

The following table is a reconciliation of the warrant liability measured at fair value using level 3 inputs (in thousands):

 

 

Warrant

Liability

 

Balance at December 31, 2013

$

23,421

 

Change in fair value of common stock warrants during six months ended June 30, 2014

 

(8,122

)

Exercise of warrants during six months ended June 30, 2014

 

 

 

 

 

 

Balance at June 30, 2014

$

15,299

 

 

 

 

NOTE 5 — STOCK BASED COMPENSATION

The Company recognizes stock-based compensation in accordance with ASC 718, “Compensation—Stock Compensation.” Stock-based compensation expense, which consists of the compensation cost for employee stock options and the Company’s ESPP, and the value of options issued to non-employees for services rendered, was allocated to research and development and general and administrative in the unaudited consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 as follows (in thousands):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Amortization of stock-based compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

846

 

 

$

663

 

 

$

1,517

 

 

$

1,197

 

General and administrative

 

622

 

 

 

609

 

 

 

1,217

 

 

 

1,128

 

 

$

1,468

 

 

$

1,272

 

 

$

2,734

 

 

$

2,325

 

 

 

10


 

Valuation Assumptions

The Company estimated the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is being amortized ratably over the requisite service periods of the awards, which is generally the vesting period. The fair value of employee stock options and employee purchase rights under the Company’s ESPP was estimated using the following weighted-average assumptions for the three and six months ended June 30, 2014 and 2013:

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Employee Stock Options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.81

%

 

 

0.96

%

 

 

1.82

%

 

 

1.13

%

Expected term (in years)

 

5.97

 

 

 

5.47

 

 

 

5.97

 

 

 

5.97

 

Dividend yield

 

 

 

 

 

 

 

 

 

 

 

Volatility

 

94

%

 

 

102

%

 

 

94

%

 

 

101

%

Weighted-average fair value of stock options granted

$

2.79

 

 

$

4.28

 

 

$

2.89

 

 

$

4.03

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Employee Stock Purchase Plan (ESPP):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

0.18

%

 

 

0.20

%

 

 

0.18

%

 

 

0.20

%

Expected term (in years)

 

1.23

 

 

 

1.25

 

 

 

1.23

 

 

 

1.25

 

Dividend yield

 

 

 

 

 

 

 

 

 

 

 

Volatility

 

53

%

 

 

92

%

 

 

53

%

 

 

92

%

Weighted-average fair value of ESPP purchase rights

$

1.79

 

 

$

2.44

 

 

$

1.79

 

 

$

2.44

 

 

 

To determine the expected term of the Company’s employee stock options granted, the Company utilized the simplified approach as defined by SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). To determine the risk-free interest rate, the Company utilized an average interest rate based on U.S. Treasury instruments with a term consistent with the expected term of the Company’s stock based awards. To determine the expected stock price volatility for the Company’s stock based awards, the Company utilized the historical volatilities of the Company. The fair value of all the Company’s stock based awards assumes no dividends as the Company does not anticipate paying cash dividends on its common stock.

Employee Stock-based Compensation Expense

As required by ASC 718, the Company recognized $1.5 million and $2.7 million of stock-based compensation expense related to stock options and purchase rights, under the Company’s equity incentive plans and ESPP, for the three and six months ended June 30, 2014, respectively, and $1.2 million and $2.2 million of stock-based compensation for the three and six months ended June 30, 2013, respectively. As of June 30, 2014, the total unrecognized compensation cost related to unvested stock-based awards granted to employees under the Company’s equity incentive plans was approximately $12.7 million before forfeitures. This cost will be recorded as compensation expense on a straight-line basis over the remaining weighted average requisite service period of approximately 2.7 years.

Non-employee Stock-based Compensation Expense

The Company accounts for equity instruments issued to non-employees in accordance with ASC 505, “Equity.” The equity instruments consisting of stock options are valued using the Black-Scholes option pricing model. The values attributable to these options are amortized over the service period and the unvested portion of these options is remeasured at each vesting date. In connection with the grant of stock options to non-employees, the Company recorded stock-based compensation of approximately $19,000 and $55,000 for the three and six months ended June 30, 2014, respectively, and $34,000 and $0.1 million for the three and six months ended June 30, 2013, respectively.

Equity Incentive Plans

Equity Incentive Plans On January 1, 2014, an additional 1,250,000 shares was authorized for issuance under the 2004 Equity Incentive Plan (“2004 Incentive Plan”), pursuant to the annual automatic increase to the authorized shares under the 2004 Incentive Plan.

11


 

The 2004 Incentive Plan expired pursuant to its terms on April 7, 2014. No additional awards have been or will be made after April 7, 2014 under the 2004 Incentive Plan. In May 2014, the Company adopted the 2014 Equity Incentive Plan (“2014 Plan”). The terms of the 2014 Plan provide for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, other stock awards, and performance awards that may be settled in cash, stock, or other property. The total number of shares of the Company’s common stock reserved for issuance under the 2014 Plan is equal to the sum of (i) 6,000,000 newly reserved shares plus (ii) up to 6,626,157 additional shares (the “Prior Plan Shares”) that may be added to the 2014 Plan in connection with the forfeiture or expiration of awards outstanding under the 2004 Incentive Plan as of May 15, 2014 (the “Returning Shares”). The Prior Plan Shares will be added to the share reserve  under the 2014 Plan only as and when such shares become Returning Shares. At June 30, 2014, 4,446,294 shares were authorized and available for issuance under the 2014 Plan.

The following table summarizes stock option activity under the Company’s equity incentive plans:

 

Options

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

Outstanding at December 31, 2013

 

 

6,526,506

 

 

$

3.66

 

 

 

 

 

 

 

Granted

 

 

1,765,250

 

 

$

3.79

 

 

 

 

 

 

 

Exercised

 

 

(58,560

)

 

$

1.45

 

 

 

 

 

 

 

Forfeitures

 

 

(72,333

)

 

$

4.62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2014

 

 

8,160,863

 

 

$

3.69

 

 

 

7.67

 

 

 

8,434,466

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest June 30, 2014

 

 

8,071,025

 

 

$

3.69

 

 

 

7.65

 

 

 

8,412,349

 

Exercisable at June 30, 2014

 

 

4,450,857

 

 

$

3.04

 

 

 

6.60

 

 

 

7,212,989

 

 

The total intrinsic value of stock options exercised during the six months ended June 30, 2014 and 2013 were $0.2 million and $0.4 million, respectively, as determined at the date of the option exercise. Cash received from stock option exercises was $0.1 million and $0.2 million for each of the six months ended June 30, 2014 and 2013, respectively. The Company issues new shares of common stock upon exercise of options. In connection with these exercises, there was no tax benefit realized by the Company due to the Company’s current loss position.

2004 Employee Stock Purchase Plan On January 1, 2014, an additional 100,000 shares was authorized for issuance under the 2004 Employee Stock Purchase Plan (“2004 Purchase Plan”) pursuant to the annual automatic increase to the authorized shares under the 2004 Purchase Plan. For the six months ended June 30, 2014, plan participants had purchased 74,062 shares at an average purchase price of $3.91 for total cash proceeds of $0.3 million.  At June 30, 2014, 261,834 shares were authorized and available for issuance under the ESPP.

 

NOTE 6 — FAIR VALUE MEASUREMENTS AND MARKETABLE SECURITIES

The Company accounts for its marketable securities in accordance with ASC 820 “Fair Value Measurements and Disclosures.” ASC 820 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. For Level 2 securities that have market prices from multiples sources, a “consensus price” or a weighted average price for each of these securities can be derived from a distribution-curve-based algorithm which includes market prices obtained from a variety of industrial standard data providers (e.g. Bloomberg), security master files from large financial institutions, and other third-party sources. Level 2

12


 

securities with short maturities and infrequent secondary market trades are typically priced using mathematical calculations adjusted for observable inputs when available.

The following table sets forth the Company’s financial assets (cash equivalents and marketable securities) at fair value on a recurring basis as of June 30, 2014 and December 31, 2013:

 

 

Fair Value as of

June 30,

2014

 

 

Basis of Fair Value Measurements

 

(in thousands)

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

6,463

 

 

$

6,463

 

 

$

 

 

$

 

Certificates of deposit

 

2,844

 

 

 

 

 

 

2,844

 

 

 

 

Corporate debt securities

 

40,937

 

 

 

 

 

 

40,937

 

 

 

 

U.S. Government securities

 

20,023

 

 

 

 

 

 

20,023

 

 

 

 

Municipal securities

 

1,450

 

 

 

 

 

 

1,450

 

 

 

 

Commercial paper

 

3,498

 

 

 

 

 

 

3,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

75,215

 

 

$

6,463

 

 

$

68,752

 

 

$

 

 

 

 

Fair Value as of

December 31,

2013

 

 

Basis of Fair Value Measurements

 

(in thousands)

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

4,285

 

 

$

4,285

 

 

$

 

 

$

 

Certificates of deposit

 

1,584

 

 

 

 

 

 

1,584

 

 

 

 

Corporate debt securities

 

49,019

 

 

 

 

 

 

49,019

 

 

 

 

U.S. Government securities

 

21,731

 

 

 

 

 

 

21,731

 

 

 

 

Municipal securities

 

2,815

 

 

 

 

 

 

2,815

 

 

 

 

Commercial paper

 

2,599

 

 

 

 

 

 

2,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

82,033

 

 

$

4,285

 

 

$

77,748

 

 

$

 

 

The Company invests in highly-liquid, investment-grade securities. The following is a summary of the Company’s available-for-sale securities at June 30, 2014 and December 31, 2013:

 

As of June 30, 2014 (in thousands):

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Money market funds

$

6,463

 

 

$

 

 

$

 

 

$

6,463

 

Certificates of deposit

 

2,844

 

 

 

 

 

 

 

 

 

2,844

 

Corporate debt securities

 

40,930

 

 

 

12

 

 

 

(5

)

 

 

40,937

 

U.S. Government securities

 

20,013

 

 

 

11

 

 

 

(1

)

 

 

20,023

 

Municipal securities

 

1,450

 

 

 

 

 

 

 

 

 

1,450

 

Commercial paper

 

3,498

 

 

 

 

 

 

 

 

 

3,498

 

 

 

75,198

 

 

 

23

 

 

 

(6

)

 

 

75,215

 

Less cash equivalents

 

6,463

 

 

 

 

 

 

 

 

 

6,463

 

Total marketable securities

$

68,735

 

 

$

23

 

 

$

(6

)

 

$

68,752

 

 

As of December 31, 2013 (in thousands):

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Money market funds

$

4,285

 

 

$

 

 

$

 

 

$

4,285

 

Certificates of deposit

 

1,584

 

 

 

 

 

 

 

 

 

1,584

 

Corporate debt securities

 

49,001

 

 

 

25

 

 

 

(7

)

 

 

49,019

 

U.S. Government securities

 

21,722

 

 

 

12

 

 

 

(3

)

 

 

21,731

 

Municipal securities

 

2,814

 

 

 

1

 

 

 

 

 

 

2,815

 

Commercial paper

 

2,599

 

 

 

 

 

 

 

 

 

2,599

 

 

 

82,005

 

 

 

38